If you’ve met me, read any of my previous articles or listened to my podcast, “The Big Bo $how” (available on Spotify or Apple Podcasts) you’ll know that I love football. There are so many aspects that I love about it, but one of my favorite parts by far is when I can relate the game to the world of personal finance and the creation of sustainable wealth.
Being a major Miami Dolphins fan (more a love/hate relationship through the years) the recent trade that the Miami Dolphins made for Tyreek Hill got me pondering why this took place. Did the Kansas City Chiefs trade Hill because they think he’s “past his prime” or because he didn’t fit into the team culture?
The answer is actually none of the above. Hill was traded because of the contract he was asking for. If the Chiefs didn’t make this trade, then two players—the second being Patrick Mahomes—would account for 35% of their entire salary cap.1 The same thing occurred when the Packers traded Devante Adams, as he and Aaron Rodgers would have eaten up 37.5% of the Green Bay salary cap. It’s worth noting these teams would have 51 other players to pay, and they would presumably want the best that they could get!
The ‘Investments’ Potentially Harming Your Wealth Generation
Contemplate these four actions I see most people having to take in their financial journey:
Buying a home
Paying for college
Getting a job or starting your own business
“Keeping up with the Joneses”
So how does it relate to your finances? Well, on the path to creating sustainable wealth, we often face similar situations the Chiefs and Packers made. Sink a lot of short-term wealth into the “shiny object” or not. The issue is, in my opinion, like the Chiefs and Packers, a lot of people don’t do enough long-term thinking and planning. I want you to contemplate Newton’s Third Law: Every action has an equal and opposite reaction.2 This applies at work, in sports, and of course, to your finances.
Is Your Dream Home
More of a Nightmare?
Let’s start with the big house of your dreams. An admirable goal, sure, so much so that it is a pillar of the “American Dream.” People will tell you that your home is an investment and a safe place to hold your money. The problem, as I see it, is that is exactly what it does: hold your money. The mistaken action I often see people make when purchasing a home is to buy to the limits of their budget. What is the reaction? Your money becomes tied to a heavy anchor that can hurt your cash flow and liquidity.
I’m going to ruffle some feathers here, but in many cases, your home isn’t an investment. For starters, it doesn’t generate any cash flow. Secondly, if the value of your house goes up, you can’t access this money unless you refinance your home or you take a HELOC (home equity line of credit). But this allows you to get the cash for an interest-bearing fee. You could sell, but what’s the plan? Uproot your entire life? No, you look nearby. The problem is that if your home is going up, it’s fair to assume the other homes in your local area are, too. This should offset any potential gains of a local move, thus, still leaving you cash-strapped to that heavy anchor!
Paying for Little Peter to Eventually Have Him Pay for Older Paul
OK, let’s look at another common financial investment—your children’s future. By this, I mean saving for college. You scrimp and save every penny, tuck it all away, and fund college for your kids. The problem is if you give all your pennies to your kids future, what will you have left to fund your future? In attempting to save your kids from student debt, you leave yourself dependent on the children you funded! In essence, you’re becoming indebted to the student you tried to save from debt, which then puts pressure on them as they may have to look after you, too, as you age. The cycle continues.
It’s an emotional decision to give all of your money to your kids. Emotions often don’t mix well with long-term financial decisions!
The Myth of the Stable Paycheck
We’ve all most likely been given this advice. In fact, at some point or another, we’ve probably given this advice to someone else. Get a steady job, at a good company, and collect a great paycheck. Then go, spend it all; you deserve it and you work so hard. Treat yourself! Sound familiar?
The problem with this mentality is that we aren’t building any equity for ourselves or our families. We aren’t creating sustainable wealth for those who matter most.
The COVID-19 lockdown caused ripples everywhere, and one of the biggest ripples in the business world is still occurring—what has been coined The Great Resignation.3 It seems that people have come to a similar realization that I once did: If you work for others who seemingly don’t really care about your future over their present, you are a renter. If you work for yourself, you’re an owner. The problem is that starting out on your own has risks. (Believe me, I know.) It certainly doesn’t help when that large paycheck is so alluring.
So, what do we do? Stay put, be beholden to what others think you should be, and attempt to enjoy what are labeled as our “golden years” when we’re frankly too tired to do so. Well, if you properly plan and invest in your future, it gives you the flexibility to live life on your terms, not others.
The Lifestyle Trap—‘Mr. Jones and Me’
Lastly, we have the lifestyle trap—one of the few financial traps that truly doesn’t discriminate. A stable income can be addictive because it allows for certain luxuries on a regular basis. As is often the case, as this income increases, so does the amount of luxuries.
As I often discuss with clients and prospects alike, wealth is a function of spending. So, as your lifestyle expenses increase, so does the amount of investable assets you need to sustain this lifestyle. For a sustainable future, we attempt to get clients into the 3% annual spending “green zone.” This means that if you need $100,000 in annual spending to live the life you want, you will need $3.3 million of liquid, investable assets. If that number climbs up to $300,000 a year, you’ll need a cool $10 million. Do you have that laying around after treating yourself?
The #1 Answer in Finance
So, what’s the common denominator here? We sink all of our money into one choice? Like the Chiefs and Packers, we try to have the biggest stars in Patrick Mahomes and Aaron Rodgers, no matter what it means for the team as a whole?
In my opinion, what we should do instead is take the Tom Brady approach. (I know I talk about this guy a lot despite being a Dolphins “fan.”) The man who rightly has the title of the GOAT (greatest of all time) has been paid less than $15 million per season on average.4 A number that is still high, but very modest when compared to the likes of Patrick Mahomes4 ($45M average salary) and Aaron Rodgers4 ($20M average salary, and his current $50M salary). Brady doesn’t want to soak up a team’s salary cap because he knows his passes are only as good as the person catching them. And he can only throw if he has good linemen blocking for him. He knows that his actions will have an equal and opposite reaction to his collective team. Just like your actions should have an equal and opposite reaction to your team—your family! After all, who of these names has more rings?
I know what you’re thinking: Only the extremely wealthy can manage all of these things at once, so what’s the best choice for me? What’s the best financial answer for me?
Well, to quote my favorite finance college professor when he asked us, “What’s the #1 answer in finance?” “It depends.” It depends on your circumstances, your goals, and a variety of different variables in your unique financial equation.
Jason Blumstein, CFA® is the CEO & founder of Julius Wealth Advisors, LLC (www.juliuswealthadvisors.com) a registered investment adviser. He is also the host of “The Big Bo $how” podcast available on Spotify and Apple Podcasts. Jason has been investing and educating himself on personal finance since the age of 10. His company’s mission is to empower people to live their best financial lives, while fostering an ecosystem of integrity, knowledge and passion. Jason resides in Englewood with his wife and two kids. He can be reached at 201-289-9181 and/or [email protected]
This piece contains general information that is not suitable for everyone and was prepared for informational purposes only. Nothing contained herein should not be construed as a solicitation to buy or sell any security or as an offer to provide investment advice. Past performance does not guarantee any future results. For additional information about Julius Wealth Advisors, including its services and fees, contact us or visit adviserinfo.sec.gov.
1. The Chiefs had to trade Tyreek Hill to the Dolphins and it’s all DeAndre Hopkins’ fault: USA Today, March 23, 2022
2. Newton’s Third Law:The Physics Classroom https://bit.ly/3OvLM7s
3. Who Is Driving the Great Resignation? Harvard Business Review, September, 15 2021